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First Substitute H.B. 129

Representative Curtis Oda proposes the following substitute bill:




Chief Sponsor: Curtis Oda

Senate Sponsor: Jerry W. Stevenson

             7      LONG TITLE
             8      General Description:
             9          This bill modifies the Insurance Code to address surplus lines of insurance.
             10      Highlighted Provisions:
             11          This bill:
             12          .    addresses audits conducted by a surplus lines insurer;
             13          .    enacts provisions related to earned premiums; and
             14          .    makes technical changes.
             15      Money Appropriated in this Bill:
             16          None
             17      Other Special Clauses:
             18          None
             19      Utah Code Sections Affected:
             20      AMENDS:
             21           31A-15-103 , as last amended by Laws of Utah 2011, Chapter 62
             23      Be it enacted by the Legislature of the state of Utah:
             24          Section 1. Section 31A-15-103 is amended to read:
             25           31A-15-103. Surplus lines insurance -- Unauthorized insurers -- Audits -- Earned

             26      premium.
             27          (1) Notwithstanding Section 31A-15-102 , a foreign insurer that has not obtained a
             28      certificate of authority to do business in this state under Section 31A-14-202 may negotiate for
             29      and make an insurance contract with a person in this state and on a risk located in this state,
             30      subject to the limitations and requirements of this section.
             31          (2) (a) For a contract made under this section, the insurer may, in this state:
             32          (i) inspect the risks to be insured;
             33          (ii) collect premiums;
             34          (iii) adjust losses; and
             35          (iv) do another act reasonably incidental to the contract.
             36          (b) An act described in Subsection (2)(a) may be done through:
             37          (i) an employee; or
             38          (ii) an independent contractor.
             39          (3) (a) Subsections (1) and (2) do not permit a person to solicit business in this state on
             40      behalf of an insurer that has no certificate of authority.
             41          (b) Insurance placed with a nonadmitted insurer shall be placed with a surplus lines
             42      producer licensed under Chapter 23a, Insurance Marketing - Licensing Producers, Consultants,
             43      and Reinsurance Intermediaries.
             44          (c) The commissioner may by rule prescribe how a surplus lines producer may:
             45          (i) pay or permit the payment, commission, or other remuneration on insurance placed
             46      by the surplus lines producer under authority of the surplus lines producer's license to one
             47      holding a license to act as an insurance producer; and
             48          (ii) advertise the availability of the surplus lines producer's services in procuring, on
             49      behalf of a person seeking insurance, a contract with a nonadmitted insurer.
             50          (4) For a contract made under this section, a nonadmitted insurer is subject to Sections
             51      31A-23a-402 , 31A-23a-402.5 , and 31A-23a-403 and the rules adopted under those sections.
             52          (5) A nonadmitted insurer may not issue workers' compensation insurance coverage to
             53      an employer located in this state, except for stop loss coverage issued to an employer securing
             54      workers' compensation under Subsection 34A-2-201 (3).
             55          (6) (a) The commissioner may by rule prohibit making a contract under Subsection (1)
             56      for a specified class of insurance if authorized insurers provide an established market for the

             57      class in this state that is adequate and reasonably competitive.
             58          (b) The commissioner may by rule place a restriction or a limitation on and create
             59      special procedures for making a contract under Subsection (1) for a specified class of insurance
             60      if:
             61          (i) there have been abuses of placements in the class; or
             62          (ii) the policyholders in the class, because of limited financial resources, business
             63      experience, or knowledge, cannot protect their own interests adequately.
             64          (c) The commissioner may prohibit an individual insurer from making a contract under
             65      Subsection (1) and all insurance producers from dealing with the insurer if:
             66          (i) the insurer willfully violates:
             67          (A) this section;
             68          (B) Section 31A-4-102 , 31A-23a-402 , 31A-23a-402.5 , or 31A-26-303 ; or
             69          (C) a rule adopted under a section listed in Subsection (6)(c)(i)(A) or (B);
             70          (ii) the insurer fails to pay the fees and taxes specified under Section 31A-3-301 ; or
             71          (iii) the commissioner has reason to believe that the insurer is:
             72          (A) in an unsound condition;
             73          (B) operated in a fraudulent, dishonest, or incompetent manner; or
             74          (C) in violation of the law of its domicile.
             75          (d) (i) The commissioner may issue one or more lists of unauthorized foreign insurers
             76      whose:
             77          (A) solidity the commissioner doubts; or
             78          (B) practices the commissioner considers objectionable.
             79          (ii) The commissioner shall issue one or more lists of unauthorized foreign insurers the
             80      commissioner considers to be reliable and solid.
             81          (iii) In addition to the lists described in Subsections (6)(d)(i) and (ii), the commissioner
             82      may issue other relevant evaluations of unauthorized insurers.
             83          (iv) An action may not lie against the commissioner or an employee of the department
             84      for a written or oral communication made in, or in connection with the issuance of, a list or
             85      evaluation described in this Subsection (6)(d).
             86          (e) A foreign unauthorized insurer shall be listed on the commissioner's "reliable" list
             87      only if the unauthorized insurer:

             88          (i) delivers a request to the commissioner to be on the list;
             89          (ii) establishes satisfactory evidence of good reputation and financial integrity;
             90          (iii) (A) delivers to the commissioner a copy of the unauthorized insurer's current
             91      annual statement certified by the insurer; and
             92          (B) continues each subsequent year to file its annual statements with the commissioner
             93      within 60 days of the day on which it is filed with the insurance regulatory authority where the
             94      insurer is domiciled;
             95          (iv) (A) (I) is in substantial compliance with the solvency standards in Chapter 17, Part
             96      6, Risk-Based Capital, or maintains capital and surplus of at least $15,000,000, whichever is
             97      greater; and
             98          (II) maintains in the United States an irrevocable trust fund in either a national bank or
             99      a member of the Federal Reserve System, or maintains a deposit meeting the statutory deposit
             100      requirements for insurers in the state where it is made, which trust fund or deposit:
             101          (Aa) shall be in an amount not less than $2,500,000 for the protection of all of the
             102      insurer's policyholders in the United States;
             103          (Bb) may consist of cash, securities, or investments of substantially the same character
             104      and quality as those which are "qualified assets" under Section 31A-17-201 ; and
             105          (Cc) may include as part of the trust arrangement a letter of credit that qualifies as
             106      acceptable security under Section 31A-17-404.1 ; or
             107          (B) in the case of any "Lloyd's" or other similar incorporated or unincorporated group
             108      of alien individual insurers, maintains a trust fund that:
             109          (I) shall be in an amount not less than $50,000,000 as security to its full amount for all
             110      policyholders and creditors in the United States of each member of the group;
             111          (II) may consist of cash, securities, or investments of substantially the same character
             112      and quality as those which are "qualified assets" under Section 31A-17-201 ; and
             113          (III) may include as part of this trust arrangement a letter of credit that qualifies as
             114      acceptable security under Section 31A-17-404.1 ; and
             115          (v) for an alien insurer not domiciled in the United States or a territory of the United
             116      States, is listed on the Quarterly Listing of Alien Insurers maintained by the National
             117      Association of Insurance Commissioners International Insurers Department.
             118          (7) (a) Subject to Subsection (7)(b), a surplus lines producer may not, either knowingly

             119      or without reasonable investigation of the financial condition and general reputation of the
             120      insurer, place insurance under this section with:
             121          (i) a financially unsound insurer;
             122          (ii) an insurer engaging in unfair practices; or
             123          (iii) an otherwise substandard insurer.
             124          (b) A surplus line producer may place insurance under this section with an insurer
             125      described in Subsection (7)(a) if the surplus line producer:
             126          (i) gives the applicant notice in writing of the known deficiencies of the insurer or the
             127      limitations on the surplus line producer's investigation; and
             128          (ii) explains the need to place the business with that insurer.
             129          (c) A copy of the notice described in Subsection (7)(b) shall be kept in the office of the
             130      surplus line producer for at least five years.
             131          (d) To be financially sound, an insurer shall satisfy standards that are comparable to
             132      those applied under the laws of this state to an authorized insurer.
             133          (e) An insurer on the "doubtful or objectionable" list under Subsection (6)(d) or an
             134      insurer not on the commissioner's "reliable" list under Subsection (6)(e) is presumed
             135      substandard.
             136          (8) (a) A policy issued under this section shall:
             137          (i) include a description of the subject of the insurance; and
             138          (ii) indicate:
             139          (A) the coverage, conditions, and term of the insurance;
             140          (B) the premium charged the policyholder;
             141          (C) the premium taxes to be collected from the policyholder; and
             142          (D) the name and address of the policyholder and insurer.
             143          (b) If the direct risk is assumed by more than one insurer, the policy shall state:
             144          (i) the names and addresses of all insurers; and
             145          (ii) the portion of the entire direct risk each assumes.
             146          (c) A policy issued under this section shall have attached or affixed to the policy the
             147      following statement: "The insurer issuing this policy does not hold a certificate of authority to
             148      do business in this state and thus is not fully subject to regulation by the Utah insurance
             149      commissioner. This policy receives no protection from any of the guaranty associations created

             150      under Title 31A, Chapter 28."
             151          (9) Upon placing a new or renewal coverage under this section, a surplus lines
             152      producer shall promptly deliver to the policyholder or the policyholder's agent evidence of the
             153      insurance consisting either of:
             154          (a) the policy as issued by the insurer; or
             155          (b) if the policy is not available upon placing the coverage, a certificate, cover note, or
             156      other confirmation of insurance complying with Subsection (8).
             157          (10) If the commissioner finds it necessary to protect the interests of insureds and the
             158      public in this state, the commissioner may by rule subject a policy issued under this section to
             159      as much of the regulation provided by this title as is required for a comparable policy written
             160      by an authorized foreign insurer.
             161          (11) (a) A surplus lines transaction in this state shall be examined to determine whether
             162      it complies with:
             163          (i) the surplus lines tax levied under Chapter 3, Department Funding, Fees, and Taxes;
             164          (ii) the solicitation limitations of Subsection (3);
             165          (iii) the requirement of Subsection (3) that placement be through a surplus lines
             166      producer;
             167          (iv) placement limitations imposed under Subsections (6)(a), (b), and (c); and
             168          (v) the policy form requirements of Subsections (8) and (10).
             169          (b) The examination described in Subsection (11)(a) shall take place as soon as
             170      practicable after the transaction. The surplus lines producer shall submit to the examiner
             171      information necessary to conduct the examination within a period specified by rule.
             172          (c) (i) The examination described in Subsection (11)(a) may be conducted by the
             173      commissioner or by an advisory organization created under Section 31A-15-111 and authorized
             174      by the commissioner to conduct these examinations. The commissioner is not required to
             175      authorize an additional advisory organization to conduct an examination under this Subsection
             176      (11)(c).
             177          (ii) The commissioner's authorization of one or more advisory organizations to act as
             178      examiners under this Subsection (11)(c) shall be:
             179          (A) by rule; and
             180          (B) evidenced by a contract, on a form provided by the commissioner, between the

             181      authorized advisory organization and the department.
             182          (d) (i) (A) A person conducting the examination described in Subsection (11)(a) shall
             183      collect a stamping fee of an amount not to exceed 1% of the policy premium payable in
             184      connection with the transaction.
             185          (B) A stamping fee collected by the commissioner shall be deposited in the General
             186      Fund.
             187          (C) The commissioner shall establish a stamping fee by rule.
             188          (ii) A stamping fee collected by an advisory organization is the property of the advisory
             189      organization to be used in paying the expenses of the advisory organization.
             190          (iii) Liability for paying a stamping fee is as required under Subsection 31A-3-303 (1)
             191      for taxes imposed under Section 31A-3-301 .
             192          (iv) The commissioner shall adopt a rule dealing with the payment of stamping fees. If
             193      a stamping fee is not paid when due, the commissioner or advisory organization may impose a
             194      penalty of 25% of the stamping fee due, plus 1-1/2% per month from the time of default until
             195      full payment of the stamping fee.
             196          (v) A stamping fee relative to a policy covering a risk located partially in this state
             197      shall be allocated in the same manner as under Subsection 31A-3-303 (4).
             198          (e) The commissioner, representatives of the department, advisory organizations,
             199      representatives and members of advisory organizations, authorized insurers, and surplus lines
             200      insurers are not liable for damages on account of statements, comments, or recommendations
             201      made in good faith in connection with their duties under this Subsection (11)(e) or under
             202      Section 31A-15-111 .
             203          (f) An examination conducted under this Subsection (11) and a document or materials
             204      related to the examination are confidential.
             205          (12) (a) For a surplus lines insurance transaction in the state entered into on or after
             206      May 13, 2014, if an audit is required by the surplus lines insurance transaction, a surplus lines
             207      insurer:
             208          (i) shall exercise due diligence to initiate an audit of an insured to determine whether
             209      additional premium is owed by the insured by no later than six months after the expiration of
             210      the term for which premium is paid; and
             211          (ii) may not audit an insured more than three years after the surplus lines insurance

             212      transaction expires.
             213          (b) A surplus lines insurer that does not comply with this Subsection (12) may not
             214      charge or collect additional premium in excess of the premium agreed to under the surplus
             215      lines insurance transaction.
             216          (13) (a) For purpose of this Subsection (13), "initial premium" is the premium paid by
             217      an insured under an auditable surplus lines insurance contract on the basis of estimated
             218      exposure covered by the surplus lines insurance contract.
             219          (b) For an auditable surplus lines insurance transaction in this state entered into on or
             220      after May 13, 2014, the following apply:
             221          (i) A surplus lines insurer may not consider as earned premium an amount in excess of
             222      50% of the initial premium paid by an insured until the earlier of:
             223          (A) when an audit is completed; or
             224          (B) the term of the surplus lines insurance contract has expired and the time to conduct
             225      an audit has lapsed.
             226          (ii) If a surplus lines insurance contract provides for an audit, the audit shall be
             227      conducted as provided under Subsection (12), and after the audit is completed:
             228          (A) if the actual exposure covered by the auditable portion of the surplus lines
             229      insurance contract exceeds the estimate upon which the initial premium is based, the surplus
             230      lines insurer is entitled to additional premium; and
             231          (B) if the actual exposure covered by the auditable portion of the surplus lines
             232      insurance contract is less than the estimate upon which the initial premium is based, the insured
             233      is entitled to a refund of that portion of the initial premium that represents the reduction of
             234      exposure.
             235          (c) An insured may request an audit under an auditable surplus lines insurance contract
             236      described in this Subsection (13) if the insured believes that the actual exposure is less than the
             237      estimated exposure used to determine the initial premium by no later than six months after the
             238      expiration of the term for which initial premium is paid. If the surplus lines insurer does not
             239      complete an audit as provided in Subsection (12) after a request from the insured, the surplus
             240      lines insurer shall accept the insured's statement of actual exposure and refund that portion of
             241      the initial premium that represents the reduction of exposure stated by the insured.
             242          (d) The commissioner may impose penalties for a violation of this Subsection (13) in

             243      accordance with Section 31A-2-308 .
             244          (14) Subsections (12) and (13) apply to the extent permitted by federal law.

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